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2018 U.S. Retail Holiday Trends Guide

CBRE Research

2018 U.S. Retail Holiday Trends Guide

October 25, 2018

Holiday Sales Forecasts: Optimism, Omnichannel & Blurred Lines

4 Key Trends

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Optimism and Omnichannel

With consumer spending growth exceeding expectations and a positive turn in retailer earnings over the first half of the year, holiday sales forecasts are optimistic. Retailers are expected to push their omnichannel strategies more than ever during this holiday season and encourage shoppers to buy across channels.

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Retail gets BOSSy

As the cost and complexity of home delivery grows, retailers will focus on having online orders shipped to their stores. In addition to the more traditional buy-online/pick-up-in-store model (BOPS), retailers are introducing a more complex concept—buy-online/ ship-to-store (BOSS).

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A New Approach to Loyalty

Consumers today have more shopping options than ever before, forcing retailers to increase their efforts to both gain and retain business. This holiday season will usher in a significant innovation in retailer loyalty programs, with a shift in focus from discounts to experiential services and rewards.

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The Amazing Race for Toy Share

Retail sales across all channels are expected to rise between 4.3% and 4.8% this holiday season, according to the National Retail Federation, a trusted source for holiday projections. Optimistic predictions for holiday sales performance are based on positive fundamentals in both consumer spending and retailer health. On the consumer side, low unemployment, modest wage growth and near record-high sentiment continue to drive positive sales trends. On the retailer side, a shift toward more positive earnings among major players this year has underscored the belief that investments in new omnichannel strategies are finally starting to pay off. Retail sales over the first half of 2018 have supported this optimism, with year-over-year growth hitting a six-year high of more than 5% in H1 and exceeding most industry expectations.

E-commerce continues its ascent in both sales and share. Online sales are forecast to rise 16.3% year-over-year (on par with 2017 growth levels) and reach 12.5% of total retail sales (up from 11.2% in 2017). However, the lines between online and in-store are increasingly blurred as retailers recognize the interdependent nature of brick-and- mortar and online sales growth. Following extensive experimentation, retailers are learning to leverage online channels to drive store sales and vice versa. Several pure-play e-tailers and non- traditional retail brands will open their first pop-up stores this holiday season, including Wayfair, Conde Nast and Good Housekeeping magazine.While this is helping drive overall revenue, it’s also blurring the traditional boundaries between online and off-line growth.

With growth in buy-online/ship-to-store (outlined below) and in-store returns, omnichannel strategies are blurring the accounting line between in-store vs. online and making it difficult to clearly identify what is a store sale and what is internet- driven. Retailers have been re-assessing how they count and measure in-store vs. online growth, questioning whether the distinction is even worth making—a question that poses challenges for landlords, who rely on in-store sales reporting to set rents and measure tenant health. This holiday season, retailers will look more holistically at their sales than ever before, recognizing the value that online brings to store traffic and the benefit of brick-and-mortar to online purchases.

Figure 1: Holiday Retail Sales and E-Commerce Sales

Source: U.S. Census Bureau, eMarketer.com, National Retail Federation, CBRE Research, October 2018.
Note: All growth figures refer to year-over-year. Holiday sales are defined as the sum of the November and December period.

Driving Down Delivery Costs: Retail Gets BOSSy

Many retailers have successfully established their buy-online/pickup-in-store strategy (BOPS). For example, Zara reports that nearly one-third of its online orders are picked up in-store, while Home Depot reports in-store pickups for 47% of its online orders.

This holiday season, many retailers are utilizing a more advanced concept—buy-online/ship-to-store (BOSS). This advanced program entails shipping items to stores that are not regularly stocked there. Retailers such as Macy’s, Michaels and Kohl’s have announced BOSS programs. Kohl’s is currently rolling out this more robust program in 20 stores, with expectations to expand it into all of its stores within the next few months. Meanwhile, craft retailer Michaels foresees its BOPS and BOSS programs accounting for almost half of its online sales this holiday season. Since the rise of e-commerce, delivery to customers’ doorsteps has been costly and complex.

With the newly advanced BOSS program that entices shoppers to retrieve items from the store, retailers can both forego delivery costs and offer more inventory without having to stock it at the store. Kohl’s found that in addition to saving money on delivery costs, the company generates 20% to 25% in additional in-store “attachment sales” from its BOPS and BOSS programs. In response, this holiday season, Kohls is incentivizing shoppers to pick up their online orders in-store by offering $5 in “Kohl’s Cash” through an initiative called “Smart Cart.”

With the rise of omnichannel shopping—a trend highlighted in CBRE’s Definitive Guide to Omnichannel Real Estate—retailers should expect this holiday shopping season to be more interconnected than ever. As a result, many retailers likely will utilize both the BOPS and BOSS programs to lower delivery costs and increase in-store attachment sales, while ultimately providing a seamless in-store customer experience.

A New Approach to Loyalty: Rewards Get Exclusive & Experiential

Retailers are introducing exclusive and experiential services to their loyalty programs this holiday season. The internet and digital technology have exposed consumers to more brands than ever before, and as the diversity of options increases for consumers, retailers are beginning to get creative in how they retain their customer base.

Additionally, with so many options, consumers expect to be rewarded for their brand loyalty. Discount programs that were a major strategy of retailers to attract customers are beginning to give way to experiential rewards. As a result, retailers will roll out new and revamped loyalty programs this holiday season. Major chains such as Macy’s, Kohl’s, Target, Sephora, Nordstrom and Victoria’s Secret have already upgraded their loyalty programs to include experiential offerings. For example, the platinum tier of Macy’s program gets VIP access to New York City’s Fourth of July fireworks show and exclusive cooking classes from famous chefs, while Sephora offers its most loyal members exclusive access to meetings with brand founders and trips to New York Fashion Week. This trend was outlined in CBRE’s recent The Future of Retail 2030 report, which predicted that “members clubs” will play an important role in fulfilling customers’ increased expectations for loyalty rewards. Further validation of this trend is Nordstrom’s recently announced “Nordy Club,” which offers customers personalized and enhanced services and experiences, including exclusive access to products and events. The most loyal customers who spend more than $5,000 a year will be rewarded with priority access to style events and services.

With this year’s holiday season being the longest in six years, holiday sales should well exceed last year’s $692 billion,1 and retailers will compete harder than ever before to retain customers through new and revamped loyalty programs.

New Category Opportunities: The Amazing Race for Toy Share

Though most holiday retail forecasts only address the overall retail sector, CBRE Research can make some predictions around category growth based on annual prognoses. Figure 2 shows a sampling of full-year 2018 forecast growth for key consumer goods categories, which likely will be reflected in holiday sales performance.

Most interesting is the projected annual growth in the toys category—a segment that has become a battleground for market share following Toys "R" Us’ January bankruptcy filing. Forrester Research forecasts nearly 4% growth in the toys category this year, placing it above the total retail sales average and as one of the top-growth segments.

Figure 3: Toys by the Numbers

Source: Forrester, U.S. Census Bureau, eMarketer.com, CBRE Research, October 2018.
Note: figures based on a combination of company sources, third-party research and calculated estimates; the holiday period is defined as the sum of November and December.
*Based on latest available figures; TTM Q4 2016 to Q3 2017.

Toys "R" Us’ closure puts an estimated $1.3 billion dollars—nearly 5% of the overall toy market—up for grabs. Although the company’s lenders recently announced potential plans to salvage the brand and its stores under a new name, that resurrection would not happen until after the holiday season. Consequently, several major chains are vying for this share this holiday season, when an estimated 30% or $8.2 billion of toy revenue is made. The few national toy chains left to compete—large mixed-merchandise retail chains—are sensing an opportunity. Kohl’s, BJ’s Wholesale Club, Target and Walmart have all announced plans to expand their toy offering for the holidays in hopes of capturing toy spend.

The segment has also attracted the attention of specialty retail chains like Michaels, Party City, Barnes & Noble and Ace Hardware, each of which has announced toy department expansions.

The Toys "R" Us bankruptcy is also expected to bolster the revival of iconic toy retailer FAO Schwarz, which announced the reopening its Manhattan flagship in November along with shop-within-a-shop locations at several department stores. KB Toys also has announced plans to open 1,000 holiday pop-up stores under new owner Strategic Marks.

As retailers compete to capture the category sales vacuum left by Toys "R" Us’ demise, online will be an important key to growth. E-commerce penetration in the toy category is forecast to reach 35.3% in 2018, with online toy sales up 19% year-over-year. Success in the segment will likely require both investment in omnichannel options and a focus on experiential brick-and-mortar concepts, both of which likely will be seen in force over the 2018 holiday season.